What is a Supplemental Executive Retirement Plan (SERP) and how common are they?

Posted: August 18, 2020

A Supplemental Executive Retirement Plan, referred to as a “SERP”, is a non-qualified retirement plan offered as part of a long-term incentive for top-level executives. A SERP is one way to help lure and retain top talent. It is likely to be included in any incentive design structure. Often a SERP is offered in conjunction with a qualified retirement plan, such as a 401(k), providing a set benefits in addition to those in the standard retirement plan. The Supplemental Executive Retirement Plan is utilized as a long-term incentive for certain high-level executives. The idea here is that this level of talent can cost the company a lot of investment, and offering a SERP may help to ensure that a valuable executive stays long enough to reap its benefits. In one way it could be viewed as a sort of insurance policy for the company, since it increases the likelihood of executive retention. It can be literally used as a tool to keep strong executives around. We mentioned that a SERP is considered “non-qualified”. Let’s jump into that. Being non-qualified means that SERPs are not subject to the same rules as qualified plans. A 401(k) is a great example of a qualified plan that has more restrictions than a non-qualified SERP. Because 401(k) accounts are monitored by the IRS, they must follow certain laws including tax rules. 401(k) accounts literally get their name from the tax code that governs them. Being a qualified plan, one of the most important limitations of a 401(k) account is the contribution limit. A non-qualified plan (a SERP for instance) does not have a contribution limit and can easily leave millions for a single individual. When considering the difference between qualified and non-qualified, it is clear that qualified plans are under more scrutiny and have more restrictions than non-qualified plans. Now we can easily understand how a Supplemental Executive Retirement Plan could be used in conjunction with other qualified retirement plans to incentivize an executive. A limitation that may be involved with a qualified plan may be augmented by a long-term SERP plan that sweetens the deal for a desirable corporate executive. Now that we understand how a Supplemental Executive Retirement Plan can offer another enticing angle to encourage executive retention, lets get further into what it is. A non-qualified plan that is offered to high-level executives in addition to other benefits, a SERP can either pay in one lump sum or in payments upon retirement depending on how it is designed. A common SERP is a cash value life insurance policy. Upon retirement, the executive is awarded with the cash value however the arrangement was specified according to the SERP agreement. While the company is paying premiums for the insurance policy, it receives a tax deduction. Also, after the retired executive passes away, the company receives benefits of the life insurance tax-free. This cash value life insurance policy is possibly the most common type of SERP, though other forms do exist. Lastly, how common are SERPs and are you likely to be offered one as part of your retirement plan? After climbing the corporate ladder for years, if one is lucky enough to become an executive, SERPs are still not that likely. After getting to that high-level executive position, one also needs to be indispensable to the company. It is possible for a Supplemental Executive Retirement Plan to be offered during a renegotiation or a new employment offer. To learn more about maximizing executive salary, visit our Contact Page, or contact us directly by email at fglassner@veritasecc.com or by phone at 415-618-6060.